Welcome to Nordic Semiconductor's fourth quarter 2016 results. It's a pleasure to see all of you here, and I jump straight into it. Today, I will do the update of the business in Q4. Pål Elstad, our CFO, will go through all the numbers, and then we will go through business outlook with Thomas Embla Bonnerud. He is the Director of Strategy and IR. Look at the financial summary. Revenue last quarter was $52.6 million. It's 13% up year-on-year. It's actually up 1% quarter-on-quarter. Keep in mind that we had around $4 million that were not shipped in Q3, that we shipped in Q4. There is still seasonality. Bluetooth revenue went up to $30.6 million, that's a 7% growth year-on-year.
Keep in mind that we had a large customer that we... last year, or in 2015, we didn't have 2016. Our gross margin ended up at 46.2, and our adjusted EBIT was $1.5 million. Last year, we had a $7 million income from pension. The important thing which you see here on the slide at the left-hand side. In Q4 2015, the top 10 customers constituted 47% of our revenue, and especially one customer was a large part of this revenue. Throughout the year 2016, we've been able to diversify our customer base and become less dependent on one account. It's important. The same time, throughout the year, we've been growing our number of active customers with 45% year-on-year. It's impressive growth when it comes to number of customers.
What we also see is that this definition here is 10,000 units or more during the last 6 months. 10,000 units is usually the start, I would say, pre-production of some of these customers. They have expectations of larger volume when they run into steady production. I just want to show some products powered by Nordic, and I would like you guys to look at the bottom line first. What we see here is a headset uncertain . In the bottom line, says nRF52. That's the latest family. Here we see a design win that are moving into production now. Bong is a watch activity tracker. Here, again, you see the nRF52 family. Door lock, we see 52 family. Withings Steel, you see here, smartwatch that is basically looking like a conventional watch.
We see quite a bit of these high-end brands adopting 2.4 or Bluetooth for having functions without looking like sports activity monitors, without looking like an ordinary sports watch. Here we see cool application. We call it the Airbnb of parking. If someone lives in a busy city, have a parking lot, and going to be away from the city for a week or a couple of days, you can put this lock up, and I, visiting the city, can have an app, and I will find that this is free. I can rent this parking space because the owner has advertised that this parking space is free. It's a cool application. It shows that smart city applications are starting to appear. Another thing with this foil, it shows that Nordic Semiconductor have to build up our inventory of the nRF52.
As I said, last time we spoke, was that we had some yield issues with the first batch of the nRF52. This is fixed. We still are shipping the first batch to customers. We are testing it good. That affects, unfortunately, the margins a bit. I think it's been a year that some of our partners feel it's been a transition year. It's not been a year where we've been applauding for the revenue, neither of our customers or us. It's been a fantastic year. We've been building momentum when it comes to design win. If you look at this graph, this is a graph from one of one banker. If you see larger companies than Nordic, how they've been developed, the red one here, for example, is basically been steady and are declining. Much larger company than Nordic.
Another company here, the green one, has tried to get a foothold, but Nordic is winning the signs. Last quarter, we added 107 new qualifications at Bluetooth SIG. Most of these products are entering into production over the next quarters. Last quarter, we discussed sales funnel. If you go back and look at that point, you will see more or less expected timing. 55% year-on-year growth for design certifications. We had a quarterly decline in Q4, but that's for the total market. Nordic, we said we have technology leadership in Bluetooth Smart. Why? We were first to market with Bluetooth 5. That's a strong statement. Bluetooth 5 is the biggest update to Bluetooth Low Energy ever. 4x range, 2x data throughput, and 8x broadcast.
We have been shipping nRF52 family ahead of Bluetooth 5, but it doesn't affect our customers because they can download Bluetooth 5 to all existing nRF52 family parts that's out there at our customer base. Isn't that great? We did a presentation at the end of last year, when we introduced our new high-end System on Chip. The feedback from the market has been tremendous, and I'm going to show you a number that understate this. We are bringing much more value solution for higher-end application. What we see is that higher-end application is continue to grow. There are more memory, more interfaces. We even have built-in power management. One thing that our customers are focusing on is security. Nordic have advanced security into the high-end nRF52 series. We are the true leader of Bluetooth today. Maybe not everybody recognize this, but for sure, the industry appreciates it.
We received recognition from GSA, Global Semiconductor Alliance. We got an award for the Most Respected Public Semiconductor Company worldwide in a revenue from $100 million-$500 million. This was voted by customers and competition. The guys in our industry appreciates the work we're doing. It's an extremely strong recognition. If you think of global semiconductor, have more than 400 semiconductors, users and semiconductor vendors as members. This is a nonprofit international trade organization. I tell my guys at Nordic that this is the Oscar of Semiconductor, and we are proud to receive that. We didn't receive it only this year. Last year, we received the European Best Company. We continue to gain recognition in our own market, and that's because the guys that know what we're doing, understand it and appreciate it. That's rewards.
The best reward we can get is to ensure new design win and to excite and have momentum with developers. Our nRF52840 is the new chip we launched in December. We sold more than 1,500 kits from the day we launched the product till the 31st of December. Customers were waiting for us to release this product, pushed the button as soon as we opened the order for these design kits. 2016, all over, was another great year for development kit sales. We sold close to 37,000 design kit. Wherever you are in lab, where they do work with connectivity, it's very likely to find a Nordic Semiconductor development kit and Nordic Semiconductor on the PCBs. We are making headway, and these numbers you see here, will also turn into numbers of developers that are working with Nordic chip.
Again, it will return into revenue when we go through our sales funnel. It's already led to us getting more than 107 certification on Bluetooth SIG last quarter. This momentum we have now, we need to capitalize on, and that's what Thomas is going to talk about in his last session of this presentation. Now I will let Pål talk about the financials.
Thank you, Svenn-Tore. I will start with revenue. As Svenn-Tore mentioned, revenue in the quarter was $52.6 million, up 13% compared to last year. Seems to be it's a strong Q4, although we do have the product delivery delays in Q3 impacting the Q4 numbers. Bluetooth at $30.6 million, up 7% versus last year. If you adjust that for the loss of the socket in 2015, the reported growth in Bluetooth Smart is 26%. Proprietary sales at $19.5 million, 26% up from last year, partly due to the delivery delays, but also an overall strong PC peripherals market at the end of 2016. You will also see that ASICs and consulting is strong in the last quarter at $2.5 million, compared to $1.5 million last year.
As we've been saying, ASICs do go up and down, and it's not a focus area for Nordic anymore. If you go into revenue by market, consumer electronics at +17 versus last year, it's both the delivery delays and, of course, the PC sales in the quarter. Wearables, which used to be our strongest Bluetooth Smart market, is showing a decline of 27% versus last year. Of course, mainly related to the loss of the socket in 2015. If we do adjust for the loss of this product, the increase would have been 8% in the quarter. We are back to growth, adjusted for this 1 socket in 2016.
What we mentioned last quarter is that a lot of the new 52 designs, design wins, are within the wearable sector, so we do expect wearables to gain momentum during 2017 again. To building and retail. Building and retail is a very interesting market for Nordic, and I think this is the first quarter it really gains a lot of revenue, up 141% compared to last year. As you remember, building and retail includes also the RFID customer that we've had for quite a long time, but what's happening during the last part of 2016 is that we're getting more and more traction on payment cards, but especially on smart cities, it's getting very, very interesting within building and retail. If you go to healthcare, +7% versus last year, 21% down versus last quarter.
Healthcare is a little bit cyclical, and there are some big projects coming in, and it varies from quarter to quarter. That's why you see a reduction compared to last quarter. As we discussed in the Q3 presentation, certifications, especially in the U.S., is going at a much faster pace than we had expected. We do see good traction within this market in 2017. Others is mainly dominated by the module manufacturers. Last quarter, we reported 70 modules from Nordic with Nordic products in. This year, this quarter, we counted 120 modules. Out of the 120, around 40 are with nRF52. These are the module manufacturers. They can actually pick what they think is the best Bluetooth Smart chip, and they have apparently picked Nordic in their products.
If we go to gross margin at 46.2% this quarter, more or less the same amount as in Q3, down from 15.1% in the same period last year. The gross margins are at the low end because it has taken more time than expected to improve the yield issue that we had, that we reported during Q3. Costs are improving, yield is improving significantly. We do have much larger volumes of the 52 in Q4 versus Q3. That's why you still see effect of this. If you go to the rest of 2017, we will see a gradual improvement of gross margins. Issues with the nRF52 and inventory purchased and produced in 2016 will also impact the beginning of 2017....
Another effect you will see that when you introduce a new product like the nRF52, it's normally to a few large customers. What we are seeing now is that the long tail is starting to adopt the nRF52, and you will normally see better margins within the long tail than with large customers. Our target is still at 50%, although the backlog from 2016 will, of course, impact 2017, so we won't have 50% on average for the year. We're stating that we do have continuing growth in OpEx. OpEx has gone from $18.7 million last year to $20.6 million, a 10.4% increase.
Out of this, about a third relates to the cellular activities, mainly the Finland operations, where the cost is $4.7 million in Q4, versus $4 million at the same time last year. The cost increase is driven, of course, by headcount growth. We had 17% more employees in this year than in last year, from 454 to 532 people. Compared to last quarter, CapEx is up 11%. Normally, you won't see that big increases quarter to quarter. However, in Q4 2016, we have done some large investments that have not been capitalized on complementary technologies. Amongst others, around half a million is spent on IT and consulting for a new technology, that I think Thomas will talk more about when he comes to his section.
Investments do impact EBIT margins, of course. Last year, we reported 8.2% in EBIT margin, adjusted for the pension income. This year, we have 2.9%. If you adjust for the cellular investments, that will generate income in the future, we've gone from 7.8% to 6.2%. Of course, this isn't only explained by the cellular. We adjust for the cellular, so the Bluetooth business is investing also quite heavily. Of course, we've only seen the reported growth in Bluetooth. The underlying growth that we've been talking about is really not reflected in these numbers. Finally, I'm gonna talk about cash flow. Net cash outflow for the quarter is $8.3 million.
We have included or increased the utilization of the revolving credit facility by Telia, so the adjusted net cash flow is $18.3 million. You will see the main negative point is, of course, inventory, which has been increased by close to $16 million. The reason for this, it's driven by a sharp increase in our nRF52 wafer inventory. We did have a purchase commitment on these wafers, that we were allowed to defer till the yield issue was solved. When we came to Q4, the yield issues were solved, so we had to take delivery of these wafers. Therefore, a big increase in the quarter. The inventory increase will be reversed during Q1 and Q2, because 52 is a very important product for us in the first half year of 2017.
If you look at the overall year, increase in working capital is the main driver of the cash flow. We do still have the $40 million red credit facility to be buffer for secure future growth. We've utilized $20 of this RCF. Okay, Thomas, I think it's your turn.
Thank you, Pål. In this section, I will talk about three things. I'll talk about the outlook for 2017, including revenue and gross margins for the first half of 2017, and then look at the full year in terms of scaling our organization. I'll talk about how we view our ability to compete for new designs in 2017, and I'll give you a status update and talk a little bit about our plans for cellular in 2017. Let's start with the short-term outlook on revenue and gross margins. Based on our current visibility, we anticipate that the revenue for the first half of 2017 will be in the range from $100 million-$107 million.
We expect that Bluetooth will be the growth driver for 2017. This guidance we have provided, the lower end of that guidance is based on 30% growth in Bluetooth, and the upper end of that guidance is based on 40% on growth in Bluetooth. As Pål said, we expect gross margins to be in the range of 46%-47% for the first half, in line with the previous half year, but still below our target of 50%. On the investment side, our plan is to continue to scale the organization throughout 2017. The planned headcount going out to 2017 is 610, which would represent an increase of 14% year-over-year. The majority of this growth will be scaling our sales and R&D organization.
On the R&D side, we are stepping up our efforts on four key areas. One is power management. The integrated power management functionality we have on the new 52840 is basically just a start on what we will do on that side. On the audio side, voice remotes and talking to things is definitely a red-hot thing for Bluetooth Low Energy right now, and we already have built a cutting-edge solution. We're not done with that, and in addition, we see a longer-term opportunity for doing audio streaming in more traditional sense, using Bluetooth Low Energy. Smart home is an important growth area. At CES, we showed a demo running a mesh solution using a technology called Thread, and that generated a lot of interest.
In 2017, we will push forward with that Thread solution, and we have other smart home-related technologies and features that we are working on. Finally, security. Security is really an all-encompassing thing that we think will be increasingly important over the next years. Again, what we've done with the new nRF52840 is just the start. These are just four areas where we see some short-term and long-term opportunities to deliver more value to our customers, to unlock some new applications and market opportunities, and strengthen our overall ability to compete in the market. I'll talk a few words about two market verticals that we are excited about. First, an update on AirFuel, magnetic resonance wireless charging technology.
Last year, in 2016, there was quite a lot of buzz about longer- range types of wireless technologies, leapfrogging AirFuel as the next-generation technology for mobile devices. As the realities around these technologies are becoming clear, it really strengthened our belief that AirFuel is the most attractive next-generation wireless charging technology for mobile devices. This opportunity is binary in nature, it's our belief that we really need a flagship smartphone to adopt this technology in order to kickstart the market. Because of this situation, we look at AirFuel as an upside for overall market growth and upside for our growth, it's actually not part at all in our guidance for the first half of 2017. Second, audio streaming over Bluetooth Low Energy.
Wireless audio is definitely getting a second spring in the market, no question about it. Today, all of that is based on classic Bluetooth. We believe that the Bluetooth SIG may enable audio streaming over Bluetooth Low Energy to enable new advancements in user experience, battery lifetime, and size on the type of, for example, earbuds. Things takes time in terms of standardization, getting chips ready, getting design wins, and adoption in mobile phones. We think that this is a 2019 and forward type of opportunity for Nordic. 2016 was a strong year in terms of design wins. We expect that strong design win and momentum will continue into 2017.
We move into this year with what we believe is the industry's strongest lineup of Bluetooth chips, and in general, low-power wireless chips. We have a broad portfolio now, covering everything from baseline, relatively simple SoCs, to the high-end side, where we have more complex offering. In other words, we cover a very, very good range in terms of price, feature, and performance points. Our SoCs are versatile and flexible, which means that they are applicable to wide range of applications. Connectivity is really core for Nordic, and we believe that we go into 2017 with really cutting-edge connectivity technology. We have early support for the newly adopted Bluetooth 5.
We recently added support for 15.4, we demonstrated Thread running on our new chips, we have done some recent upgrades to our NFC technology in the 52, adding read and write functionality. We have the most advanced software stacks in terms of topologies, throughput, range, and other things. We have a differentiated lineup, power, performance, size, and solution cost. We compare very favorably against the alternatives. We believe that we are in a separate league when it comes to quality, robustness, and interoperability. Finally, it's not only about the ICs, it's about the overall solution we provide around it, including software and development tools. On the cellular side, we continue to make advancements. In Q4, we had a successful major chipset tape out. This is our first fully integrated chipset that is suitable for customer sampling.
We do expect more tape outs before we enter production with the first customers. That means that we are on track to sample selected lead customers second half of this year. That means delivering engineering samples, software kits, and development tools. As we get more visibility on competing solution and more visibility on our own solution, we are increasingly confident in our timing and ability to compete in this new market. Financially, 2016 has been a disappointing year also from us. However, we feel that with Q4, we have a positive end to this year. We're back to growth year-on-year. Underlying growth in Bluetooth continues to be strong at 48%. It's actually a record Q4, marginal, but still, if you adjust for the $4 million transferred from Q3. We feel that we are moving into 2017 with good momentum.
We have a strong backlog of $28 million. We have a record pipeline of certified end products using Nordic. We believe that we have a strong product lineup to fuel continued design win momentum. Thanks. That was it from my end. We do Q&A.
I just have, 1 question. I was wondering if you could add any color to the underlying gross margin in Q4 if you look past the 52 yield issue?
I can do that. Obviously, when we introduce new products to the market, we are approaching our partners first, the ones that have been a Nordic user for a long time. I told you earlier that we have had design activity with nRF52 before it was introduced. These customers were the first out with our first silicon of nRF52. Obviously, they have larger volume since they are partners of ours, and since they were first with design, they used the part that we have less yield on. We do extremely strong test- out procedure because these parts are fully functional and up to the Nordic standard, and that cost us quite a bit of yield. If we had only shipped the B revision of the nRF52 device, the yield would have been significantly stronger.
I don't think we should discuss any actual number, but it's in the range more than 10% and above.
Okay, and, on the nRF51 and the rest of the portfolio is?
Yield, strong.
Thanks.
Thank you. Just following up on that question with respect to gross margins, also with respect to your guidance on gross margins. I mean, from what the case we've understood, you expected gross margins to normalize going into this year on the back of the production issues you had around the nRF52 in Q3 and Q4 of last year. End of Q3, you had an inventory of some $30.6 million, I recognize that lower, of course, than market value. You've sold about $30 million in Bluetooth Smart sales in Q4 at close to around 50% gross margin. You've depleted roughly half that inventory if it was all Bluetooth Smart, and it's likely not.
You're going to sell Bluetooth Smart for about $60 million or thereabouts in the first half, again, drawing on an inventory of about $30 million. You would deplete all the old inventory, at least by the end of Q1, and still you're guiding for a gross margin that is as weak as it was in the second half of 2016. Can you please explain how you're thinking logically around that, if gross margin, in terms of your new production series of 52, has rebounded back to a normalized level?
Yeah, I would like to do that. We have an extreme strong momentum at the moment, and we are going to sweep the floor. I'm not thinking of each customer to maximize the margin going forward. We are going to win important segments. We spend a lot of time on developing application and support around our ICs. We now see that we get traction for that complete solution, and we also know that as time and volume continue to grow, prices go down. We are going to be aggressive on our price settings for certain segments, and that is going to impact the overall margin.
The obvious follow-up question on that is what is your expectations for the average price decline on Bluetooth going into 2017 over 2016?
I think you're going to see that we will have a large tail- end customer base, which will sort of bring the prices up to normal level, and we will have some customers with high volumes that will pull it the other direction. The answer to your question is basically depending on how the mix is going to turn out. We are not letting any important segment slip due to the margin.
Based on your gross margin guidance, it seems like you expect a price decline of somewhere in the region of 5%-10% on an ASP basis?
I don't think it's that big, because I think the mix will sort of bring it up. For the moment, we have working with the largest customers that are going to drag down the margin for a while.
Secondly, I'll leave the mic here. Just you mentioned 26% growth in reported Bluetooth sales, if you adjust for the sockets lost last year. In the report, you mentioned that you have underlying revenue growth of 48% year-on-year to end customers. Can you, one, explain what kind of inventory adjustments were made at distributors in terms of recognized sales, both in Q4 or in '16 and '15? Sort of explain the discrepancy between those two numbers in terms of where underlying Bluetooth sales are. Thanks.
You do it, Pål?
Okay, yeah. This is the same thing as we explained last quarter. There will be a difference between what we ship in and what they ship out. Very simple, this month, it was more or less stable. However, in 2015, it was a buildup of inventories. This year, it was a stable inventory. That's why if you add up about $4 million, you will get the numbers to add up to 48.
Sorry, final question then. Based on your guidance from last quarter, where you had an inventory drawdown at the inventory level, which you sort of would reconcile this quarter, you haven't actually seen it or have you? It's in the numbers or it's not?
Yes.
The $2 million-$4 million, yeah?
Yeah, yeah. Absolutely.
Excellent. Thank you.
Mm-hmm. I think.
Hi, Frederick, SEB. Just following up on the gross margin, and inventory, question. You said that revision B is of the nRF52 is back on track with regards to a normalized gross margin and yields. Should we-
Sorry, I said normal yield?
Normal yield.
Yes. I also said later on that we are going to sweep the floor in some segments, and that will might do affect the margin.
Okay. The rest of your inventory, do you have any revision A still on inventory that you might have to write down during the first half of 2017?
We have a lot of A inventory, but we're not going to write down anything, because it's just a matter of testing it good, and that's what we do.
Okay. With regards to the headcount growth expected in 2017 of some 14%, can you give us some color on when, kind of your major recruitment process will take place, and how much of that will actually go towards sales and marketing?
It's continuous, ongoing. It will be a large portion on sales and field application engineering, but we also have some new products in pipeline that we will add on R&D resources. We are looking for experienced leading people in each field, so it basically is not that it's going to happen in one Q1, Q2, Q3. It happens when the right people are available.
Yeah, thanks. Just finally on your capital structure, you're taking up another $10 million in debt. Just that, put that in relation to your share repurchase program. Can you give us some explanations of how you're thinking about capital structure going forward?
I think basically, we have secured inventory for growth going into the next half year, so we don't spend too much time concerning about this. We build up our inventory, and if you look at my slide here about which products are getting into production of, it's the nRF52, so it's right for us to have the nRF52 in inventory. It will convert over to cash as we go along. No more questions? Yeah, one more.
I was just wondering if you could provide some more color on your thinking around guidance and what is included and what is not. Obviously, you mentioned that wireless charging is not included into your guidance. Is there anything at all with respect to larger contracts that is yet unannounced to the market that is included in the guidance at all? And in terms of the span, I presume that the whole full $7 million relates to expectations around your uncertainty of Bluetooth smart sales. Could you sort of discuss that range in terms of why and how you sort of see the probabilities of the lower end versus the higher end of the range, please?
We've been discussing that quite a bit. We do not have a good history on guiding. I hope you agree on that.
Yes.
We would like to change that trend, so this is a guiding that we believe is going to be solid. I don't think we need to comment more.
Final question: You, I think on your last slide, you actually state that you have a very solid backlog. Throughout last year, we talked about backlog not being very relevant for Nordic anymore. Is it back with respect to being relevant, or?
Not really, but it's a factual thing. I know that you guys are really keen on factual things, so that's why I put it in. We have more customers ordering at a shorter time. It's not that we got the longer visibility, it's that there is more of these customers, which adds up to the number in the backlog. We don't want to spend much time on it. It's not that relevant, but still, it's a nice number to show.
Thank you.
Cool.
Thanks.
Thank you all, and sorry for this, mess up, but it was not a Nordic fault. I don't use Bluetooth Smart when I transmit this. It would never happen. Thank you.